ESRI dismisses property bubble scare
Despite poor growth forecasts for this year and the next, the ESRI’s David Duffy says price increases will moderate considerably as the economy slows, but talk of a bubble in the market will not stand up.
Price increases will moderate to about 5% per annum, but the level of demand will ensure that prices will not collapse, as forecast by The Economist.
His ESRI colleague Danny McCoy added that several factors are at play in the Irish market which ought to prevent a price crash.
Strenuous efforts have been made to get supply to meet demand, while the continuing decline in interest rates has made funding loans that much easier.
While “at the margins” there may be difficulties for some borrowers, the current state of the market and the low interest rate regime, as well as the low loan-to-value ratio on most homes, do not put undue pressure on most borrowers to meet their repayments.
But Mr McCoy said it was unrealistic to dismiss a house price shock out of hand, if for instance the economy was hit by the loss of a major employer like Dell or Intel.
But that was not the basis on which The Economist built its argument. On the basis of other things being equal, Mr McCoy dismissed the bubble scare as just that.
In its quarterly review, the ESRI warns of a slowdown in growth, rising unemployment and a reduction in the rate of employment over the next two years.
Its forecast has become gloomier since its spring bulletin, cutting 0.5% off its growth forecasts for this year, pulling the GDP figure back to 2.6% and the GNP figure down to 2.4%.
It notes also the major distinction between GDP of 6.3% and GNP of 0.6% in 2002, which it attributes to the huge outflow or repatriation of profits last year.
These have been put at a massive €25 billion, and the outflow totally distorted the overall economic picture for the period.
Nothing like that distortion in profit repatriations is on the cards for this year, and that is why the gap between GNP and GDP has narrowed again in 2003, said Mr McCoy.
On the micro-economic front the ESRI said the average inflation rate of 4.6% over the first five months of 2003 would moderate further, pulling the annual average Consumer Price Index down to 3.8%. The CPI is projected to drop to a 2.7% average in 2004.
Meanwhile, Dr Edward Shinnick of UCC has argued that weak competition in the non-internationally traded sectors of the economy is a significant threat, “since many such sectors form crucial inputs into the economy’s productive capacity”.
Dealing specifically with solicitors, Dr Shinnick claimed that there are so many contradictions surrounding the regulation of the profession that “a rigorous debate is needed on the merits of regulatory reform, with an increasing emphasis on consumer interests, and the political will to carry out such change.”
